Reverse Mortgage Basics

Reverse mortgages have many benefits in the right situation. You might be interested in a reverse mortgage but may have concerns or fears from what you have heard. Maybe you have heard of them on television or from a friend and are not quite sure what they are. Maybe you already know what a reverse mortgage is, but you’re not sure if it is right for you. Maybe you are wondering if a reverse mortgage would work for your parents.

Whether or not to get a reverse mortgage is a serious decision. Depending on your situation, a reverse mortgage may or may not be the best option for you. Learning more information about reverse mortgages and how they work can help you to make an informed choice.

HECM – pronounced “Heckum”
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). Although there are other reverse mortgage programs, unless noted otherwise this is the reverse mortgage we are referring to. HECM’s are provided directly from a private lender, and are insured by the federal government through the Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD).

What is a reverse mortgage?
A reverse mortgage is a financial tool that allows you to utilize the equity in your home without having to sell it or make payments. Like the name implies, a reverse mortgage is the reverse of a traditional mortgage.

The value of your house is divided into two parts: the equity (the amount of the house you own) and debt (the amount of the house that the mortgage lender owns, still needing to be paid). With a traditional mortgage you make payments to the lender each month, increasing your equity and decreasing your debt. Eventually through continued payments you own 100% of your home.

With a Reverse Mortgage, the lender gives you money instead.
Essentially, you are getting back the equity in your house through a loan. Thus, a reverse mortgage reduces your equity and increases your debt. While you are in the home, you do not need to make any payments to the lender and you get to keep the title to your house.

Most people get a reverse mortgage on a home they already own and live in. However, you can also get a reverse mortgage to purchase a new home, assuming you will make the home your primary residence. If you sell your old home and have the cash to purchase a new home, why would you want to get a reverse mortgage? Many people don’t want to tie up all of their money in a house in case they have unexpected expenses, like medical bills, but also don’t want (or can’t afford) to make a smaller down payment and get a traditional mortgage. Of course, you could always purchase the home with cash and get a reverse mortgage later, but it can be convenient to do both at the same time.

Because the HECM is the most common reverse mortgage program, its rules and features are set, and it is what is primarily discussed here. Unless otherwise noted, the term Reverse Mortgage refers to a HECM. However, we do offer other programs that have varying features, so you can make a choice that is perfect for your situation.